Question

Exercise 22-13 Riverbed Co. purchased equipment for $573,000 which was estimated to have a useful life...

Exercise 22-13

Riverbed Co. purchased equipment for $573,000 which was estimated to have a useful life of 10 years with a salvage value of $10,200 at the end of that time. Depreciation has been entered for 7 years on a straight-line basis. In 2018, it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.

(a) Prepare the entry (if any) to correct the prior years’ depreciation.
(b) Prepare the entry to record depreciation for 2018.

Homework Answers

Answer #1
  • All working forms part of the answer
  • Please note that ‘change in the estimate of Salvage life and Life of equipment’ is a ‘change in estimates’ and not ‘change in principal’. Hence, no entry will be required to correct prior years’ depreciation.
  • Working

A

Original Cost

$              5,73,000.00

B

Salvage Value

$                 10,200.00

C=A-B

Depreciable base

$              5,62,800.00

D

Life (in years)

10

E=C/D

Annual Straight Line depreciation

$                 56,280.00

F=C x 7 years

SLM depreciation for 7 years

$              3,93,960.00

G=A-F

Book Value at the time of change in estimation

$              1,79,040.00

H

New Salvage Value

$                    5,000.00

I=G-H

New Depreciable base

$              1,74,040.00

J

New Life estimated (in years)

15

K=J - 7 years

Remaining useful life (In years)

8

L = I/K

New SLM depreciation [174040/8]

$                 21,755.00

All Journal Entry (ies)

Date

Accounts Title

Debit

Credit

a.

[No entry]

[because, such changes are change of ‘estimates’ and not change of principals. This means No adjustments are required to correct prior years’ depreciation.

b.

Depreciation expenses - Equipment

$                 21,755.00

Accumulated Depreciation – Equipment

$                 21,755.00

(new depreciation based on new estimate recorded)

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